Factors Determining the Success of the Japanese Telecom Policy over the Past Decades†
Toshiya Jitsuzumi, D.Sc.
Faculty of Economics, Kyushu University

1. Introduction
It is an undisputable fact that the Japanese telecom market is presently one of the most advanced anddynamic telecom markets in the world.

This is the result of the carefully designed and planned development in

the Japanese telecom policy over the past years.

However, this policy evolution cannot stand on its own.

Further, it cannot be guaranteed that the same set of policy initiatives would generate equally fruitful outcomes ina different setting or another country.

Therefore, it will be useful—particularly for developing nations currently

seeking efficient methods to improve their telecommunications infrastructures—to understand the key successfactors in Japan’s telecom policy development.

Thus, this article aims to discover the contributing factors basedon the decades-long experience of the Japanese telecom policy and to check their cross-country applicability.
This article is structured as follows.
presented.

In the next section, a brief history of the Japanese telecom policy isSection 3 identifies a list of factors contributing to Japan’s telecom success, and Section 4

statistically tests some of their general applicability.

Section 5 concludes the article with some policy

implications.

2. Development of the Japanese Telecom Policy
Considering the primary beneficiaries of individual policy initiatives, the development of the Japanese
telecom policy can be divided into three distinct stages, as shown in Figure 1.

It is observed that over time, theJapanese telecom policy has shifted focus from first establishing a national communication infrastructure toenhancing market efficiency, and more recently, to improving the competitive position of the national economy byproviding a better business environment for information service providers.

Stage 1: pre-1985

Stage 2: 1985−2003

Stage 3: post-2004

Primary Beneficiary:

Primary Beneficiary:

Primary Beneficiary:

1. POTS users

1. Enhanced users
2. POTS users

1. Service providers
2. Enhanced users

Main Policy Instruments:

Main Policy Instruments:¾¾

Main Policy Instruments:¾¾¾

Quasi-state monopoly
Financing from users
Limited use of network

Pro-competition policy¾ Asymmetric regulation¾ De facto standard
Liberalized use of network¾Stage 2-1: 1985−1996
Main Target:

Pro-competition policy
・ Asymmetric regulation
・ Ex-post control
・ MVNO・ Network neutralityetc.

Introduction of competition
Main Policy Instruments:¾Measures like infantindustry protection

Stage 2-2: 1997−2003
Main Target:

Fair & effective competition
Main Policy Instruments:¾

Asymmetric regulation

Figure 1 Staged Evolution of the Japanese Telecom Policy†

This article is partially supported by a Grant-in-Aid for Scientific Research (C-17530182).

Stage 1 began with the establishment of Nippon Telegraph and Telephone Public Corporation (NTT-plc) in1953 and ended with the liberalization of the market in 1985.
“quasi-state monopoly.”This stage can be referred to as a regime ofPrior to 1985, the Japanese domestic market was legally monopolized by the state-run

NTT-plc while the international market was dominated by Kokusai Denshin Denwa (KDD).
the main beneficiaries were the users of “plain old telephone services” (POTS).

During this stage,

In order to fulfill the basic

telecommunications needs of the general public as soon as possible, the government coordinated multiple policyinstruments, such as a quasi-state monopoly, financing from subscribers, and severe restrictions on the scope ofnetwork usage.

Under such an environment, NTT-plc was able to concentrate its resources on expanding thePOTS network without worrying about accommodating enhanced users and competitors’ cream skimming
activities.
Stage 2 occurred in the period from 1985 to 2003, a period characterized by the fostering of competition or
the practice of industrial policy in the telecom sector.

In 1985, the most memorable year in the Japanese

telecom history, NTT-plc was privatized and became Nippon Telegraph and Telephone Corporation (NTT), andboth the domestic and international markets were opened to new entrants under the Telecommunications
Business Law (TBL).

Since then, consumers have enjoyed the ongoing sharp declines in calling rates and thesuccessive introduction of new services, such as mobile phones and Internet access.

Since the basic

telecommunications needs had already been well addressed in Stage 1, Stage 2 primarily benefited the users ofenhanced services, such as corporate users.

Stage 2 can be further divided into two sub-stages by the NTT’s

structural reform of 1996, which unbundled its nationwide network, and be summarized as follows.

During thefirst phase, before NTT was reorganized, the telecom authority stressed the incubation of new entrants throughmeasures like infant industry protection; however, during its latter phase, it focused on establishing fair andeffective competition through asymmetric regulations on the structurally split but still dominant NTT.

This

indicates that during this stage, the Ministry of International Affairs and Communications (MIC) had been acting
as a practitioner of industrial policy than as a rule-maker of a competitive telecom market.
When the TBL was fully revised in 2004, the Japanese telecom policy entered its third stage, which aimed
to establish a new regulatory style, and allowed the market self-regulate as much as possible.
the MIC began acting as a rule-maker or a neutral troubleshooter.

In other words,

Since both basic and enhanced users wereadequately served during Stages 1 and 2, in Stage 3, the greatest beneficiaries has been and will be the network
service providers (such as telecom operators, content service providers, and broadcast stations).

The revised

TBL enables non-tariff-based services, providing ample scope for price negotiations between operators andenhanced users, thereby making enhanced users the second-most benefited.

3. “Inductively Generated” Factors for Success
Based on the overall economic and market conditions during this period and also considering thedevelopment of the Japanese telecom market till date, I propose a set of contributing factors or key drivers thathave enabled Japan to achieve such success in the telecom sector.
listed below.

1.

A favorable overall economic environment

Five of the most influential factors are2.

Gradual change in the telecom business environment that allowed an incremental approach toward
problem solving

3.

Cooperation among players in the development phase

4.

Population density and geographic patterns

5.

International competition among telecom authorities, accompanied with a “small government”
orientation

Factor 1 assumes that sufficient purchasing power among users and a strong propensity toward IT/ICT
investment by private firms—both of which are possible only when the overall economic conditions arefavorable—are very important for achieving success in the telecom field.

In Japan, with rapid economic growthin the 1960s followed by a steady economic growth in the 1970s, the basic consumer telecom demand was welladdressed by 1979.

Since then, due to a steady increase in the purchasing power, telecom users havecontinued to seek upgraded versions of existing services and/or more sophisticated and diversified services.
Demand from corporate users plays an important role as well.

Corporate users are charged a higher monthly

fixed rate for POTS than residential users; therefore, corporate demand provides a stronger financial boost fortelecom operators.

Finally, in terms of a strong propensity toward IT/ICT investment by private firms, ITinvestment by Japanese firms has grown steadily even after the collapse of the domestic stock and real estatemarkets in 1991, contributing significantly to the Japanese telecom development.
The second factor considers an “incremental approach to problem solving,” which occurs via thesynchronized development of technology/services and policy.

When technological development becomes too

fast-paced, it poses difficult challenges for administrative resource allocation, creating a risk of inappropriate
programs that can damage overall efficiency.

This negative scenario arising from such fast-paced technologicaldevelopment became apparent when the Japanese government and NTT chose fiber-to-the-home (FTTH) as a
primary instrument to boost the broadband penetration in the 1990s.

In retrospect, however, if the Japanese

government had considered additional options, the Japanese would have enjoyed an unsurpassed broadband
environment several years earlier, and Japan’s Internet economy would have taken off much earlier.
Factor 3 argues that cooperation among players, whether voluntary or mandatory, contributes significantly
to success in the development stage1.

Since the telecom market has long been characterized by natural

monopoly, the “intra-modal” competition, where new entrants rely on the incumbent’s facilities, is the only
practical option for initial market liberalization.

It is true that such cooperation between the incumbent and newentrants may cause serious damage to the incumbent’s bottom line; thus, although it may appear
self-contradictory, “unshakable market dominance of the incumbent” can be an essential prerequisite because it
allows the government to ignore such adversary impacts and practice “asymmetric” regulation2.
1

In Japan, such

Economic theory states that cutthroat competition is adept at the efficient allocation of scarce resources; however, it
may not be very good at incubating an industry sector, particularly when the market is dominated by natural monopoly
and/or Marshallian externality. In such a case, governmental leadership combined with cooperative actions withmarket players can attain better results more easily. Since 1985, the MIC has organized numerous study groups andpolicy reports; in so doing, it has not only made its priorities public but has also set up an arena for the relevant
stakeholders to establish a mutual understanding of their relatively long term objectives. Again, such an intervention
can be effective only in the presence of a cooperative atmosphere among the related stakeholders.
2
Undoubtedly, it is theoretically possible that a government can allow the dominant operator to play on its own;cooperation was fostered by the unshakable dominance of NTT, coupled with the well-supported telecom
authority.

During the initial period of opening the market, partly due to the MIC’s guidance and despite its

competitive potential, NTT had—besides acting as a provider of essential facilities—defined itself as a pricefollower; it helped incubating competing operators and devoted its resources in developing new markets.

Inshort, due to NTT’s size and stability, the Japanese government was able to foster new entrants without any
significant threat to the universal POTS, with the purpose of attaining a more diversified and less expensive
telecom service in the short run and a more competitive market in the long run.
Factors 4 and 5 are related to the factors outside the control of telecom authorities, at least in terms of theshort run.

Undoubtedly, the higher population density and flatter geographic patterns function to improve theoverall coverage of telecom services.

In addition, as competition increases, firms begin to require a moreadvanced—yet less expensive—communication infrastructure.

This need is crucial to attain a competitive

advantage at the national level and is also one of the most critical factors when a multinational firm chooses toestablish a new headquarters or operating center.

In response to these trends, the Japanese telecom authority

has engaged in “yardstick-like” competition with its counterparts in other nations in delivering the most favorable
business environment since the 1980s.

Such a pro-competitive stance has been accelerated by a “smallgovernment” orientation, which had been triggered by the heavy fiscal deficits of the Japanese government since
the end of the financial euphoria of the 1980s.

4. General applicability of Japan’s success factors
In the previous section, I presented five factors that contributed toward Japan’s success in the telecom
market.

In this section, I will review some of their cross-country applicability in the sampled OECD nations.

By employing an index of telecom services penetration as an explained variable, a two-equation system ofequations (1) and (2) is prepared for statistical verification3.

The estimation method is a two-stage least squareestimation procedure (2SLS) that explicitly controls for country-specific fixed effects.

The specifications of theestimated two-equation system are as follows:

Demand : Yt +1,i = α 0 ,i + α 1 X 1,t ,i + α 2 X 2,t ,i + α 3 X 3,t ,i + α 4 X 4 ,t ,i + α 5 X 5,t ,i + α 6 X 6,t ,i + ε i(1)Supply : Yt +1,i = β 0,i + β 1 X 1,t ,i + β 2 X 7 ,t ,i + β 3 X 8,t ,i + β 4 X 9 ,t ,i + β 5 X 10,t ,i + β 6 X 11,t ,i + ε i(2)All the variables are constructed as an international (unbalanced) panel data set with explanatory variables
that are lagged one year; the data set covers 30 nations from 1998 through 2003 and was obtained using thedatabases of ITU (2005) and OECD (2002, 2006).

The variables are logarithmically transformed before theestimation; thus, the resultant equations are log-linear.
however, most nations that introduced competition have stipulated incumbents to cooperate with new entrants (Fuke2007, p.41). Further, it should be noted that, due to technological development, new entrants can now obtain afoothold without relying on the incumbent’s essential facilities. As a result, the market dominance of the incumbent
may no longer foster the cooperative attitudes among players in the most developed nations.
3Using a single-equation model, Ros (1999), Wallsten (2001), and Fink et al. (2003) have already tested similar
hypotheses under different settings. However, in order to obtain estimates that are theoretically more consistent, bypartly following the approach of Roller and Waverman (2001), a two-equation system is employed in this article.

With regard to Japan’s success factors, if the first factor, that is, favorable economic conditions, is effectiveon the sampled OECD nations’ telecom development (Hypothesis 1), the demand side parameters on GDP per
capita ( α 2 ), R&D expenses ( α 5 ), or Researchers ( α 6 ) are positive.

If “cooperative attitudes among players”(Factor 3) works effectively in other nations (Hypothesis 2), then the supply side parameters on an incumbent’s
shares, β 2 ,β 3 and β 4 , become positive. It is true that the signs of these three parameters cannot provethe existence of the cooperative attitudes themselves; however, as Fuke (2007) indicated, since market
dominance in the telecom market is usually accompanied by some kind of regulations, this article assumes thatwhenever there is dominance, there is cooperation, whether voluntary or mandatory.

Finally, a positiveβ 6 will

confirm that population density (Factor 4) favorably affect the sample countries (Hypothesis 3).
The results of the hypothesis testing are summarized in Table 1.

Hypothesis 1 was not feasible if only thebasic POTS market is considered; however, it had a better validity in the more advanced market.

This is not

surprising at all since in the sample nations, which are all developed countries, POTS is increasingly becoming
an essential commodity as well as less price-elastic4; however, mobile phones and the Internet are not.

Table 1

Summary of the hypothesis test
Fixed telephone

Hypothesis 1

GDP per capita α2
R&D expenses α5Researchers α6

Hypothesis 2

Hypothesis 3

Market dominanceβ2
in the access market
Market dominancein the long-distance β3marketMarket dominancein the international β4marketPopulation density β6

Fixed and mobile telephone

Fixed and mobile telephone+ Internet△○○

Positive but Insignificant

Significantly positive

Significantly positive×△△

Significantly negative

Positive but insignificant

Positive but insignificant△△○Negative but insignificant

Mixed signs but insignificant

Significantly positive○△×

Significantly positive

Negative but insignificant

Significantly negative△

××

Negative but insignificant

Significantly negative

Significantly negative

△

△

△

Positive but insignificant

Negative but insignificant

Negative but Insignificant

△

△

△

Mixed signs but insignificant

Positive but insignificant

Positive but insignificant

The second hypothesis was found to be partly valid in the basic POTS market, but not in the moreadvanced market.

In other words, competition in the market can achieve a higher performance in the advancedmarket, and dominance in the access market can achieve better results in the basic telecom market.

The

classical economic theory suggests that market dominance causes monopolistic behavior and results in fewer
outputs; on the contrary, this empirical test suggests the opposite result in the basic POTS market.

Considering

the possibility of X-inefficiency (Leibenstein, 1966) in the less competitive market, this result becomes even more
surprising.
Finally, the third hypothesis did not have a significant impact on the sampled OECD nations.

Again, this is

not surprising because the developed OECD nations have already achieved a sufficient level of universal
4

Based on the household samples in the Tokyo metropolitan area in the late 1990s, Nakamura and Jitsuzumi (2007)
statistically confirmed that income elasticity is negative both for POTS and mobile telephones.

telephone services and no longer have a strong incentive for building additional infrastructure.

Obviously, I

cannot rule out the possibility that the population density data does not accurately reflect the ease of developing
telecom infrastructure as in a situation where the population is dense in a small area surrounded by a desolate
wilderness.

5. Conclusion
Statistical verifications for the general applicability of some of the factors described above on the OECDnations were attempted, and it was discovered that Factors 1 and 3 have certain feasibility.

Considering thepath-dependent characteristic of these derived factors, it is surprising that some of them are still valid under therecent economic conditions observed in the sampled OECD nations.

The most important finding is that themarket dominance of the incumbent operator has a significant impact on the basic telecom development.
However, due to the unavailability of data, verifying the applicability of the second and the fifth factors was notattempted.
The general applicability of the first factor explains the existence of the so-called “digital divide” between
the rich and poor nations.

This appears to be consistent with cross-country data revealing a strong positive

correlation between telecom penetration and GDP per capita; thus, as consumer wealth increases, it is followed
by a corresponding increase in the POTS penetration, followed by a demand for more advanced services suchas mobile phones and Internet connection.

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